Perspective

How's vaccine inequality driving up global inflation?


As the more highly vaccinated countries roll out Covid booster shots, other parts of the world are still struggling to get their first jab. The vaccine divide is more apparent in the emerging markets (EM).

World organisations have voiced their concerns over “vaccine nationalism” whereby vaccine-exporting countries prioritise supply first for their own populations before exporting the rest.

Clearly, there is the moral responsibility for getting more vaccines to under-vaccinated countries. From an economic perspective, by getting a large part of the population vaccinated, countries have been allowed to re-open and this has spurred stronger growth prospects.

Instead, economies with low vaccination rates or little natural immunity are often forced to pursue zero-Covid strategies.

That said, having a highly vaccinated population does not remove the risk of future lockdown restrictions or stop some nations continuing with zero-tolerance policies.

But the unequal distribution of vaccines is hitting global supply chains and stoking up inflation across the world. As the holiday season approaches, retailers are already warning about shortages and price rises for certain items such as toys.

Why do supply chain disruptions matter to inflation?

With large sections of the world yet to be vaccinated, the Delta variant has led to some countries imposing lockdown restrictions or constraints on mobility. This has caused bottlenecks to global supply chains and shortages. Not having enough workers is often blamed for factory closures or delays in transportation of goods.

As a result of these supply disruptions, delivery times for goods have become longer and order backlogs have risen worldwide. This can be seen in the Purchasing Managers’ Index (PMI).

According to the PMI, which is the industry’s barometer of economic activity, the length of global delivery times has hit record highs (a low number means lengthier delivery times). Similarly, the backlog of work has surged (chart 1).chart1-chart2.jpg

With supply deliveries taking longer to meet orders, production and transportation costs are likely to increase. This means suppliers have greater pricing power to pass on price rises to the consumer.

Chart 2 shows that there is generally a good relationship between longer delivery times and global inflation.

While higher prices from bottlenecks in the supply-chain are often viewed as temporary, continued supply disruptions from Covid, could mean that the impact on inflation stays for longer.

Our economics team has recently flagged the ‘supply side inflation scenario’, as the principal risk to the forecast for the global economy.

The vaccine divide between the developed and emerging markets

Some countries in EM have made great progress in rolling out the vaccines, but there remains a stark divide between the developed and EM regions. Despite accounting for half of goods exports to the world, only 28% of the EM population has been double-vaccinated. This compares to around 57% of the population in the advanced economies.[1]  

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Among the top exporters of goods in the EM region, both Vietnam and India have less than 20% of the population fully vaccinated with two doses (table 1). But India is in a better position than Vietnam for some semblance of normality.

Several devastating waves of the virus has meant that the Indian population has built a higher level of natural immunity. Instead, Vietnam’s low vaccination rate is likely to hamper the country from ending its zero-Covid policy. The latter has proven to be highly disruptive to supply chains.

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This has translated into longer delivery times for manufactured goods, such that Vietnam has one of the most extended delivery times in the EM universe (chart 3). In comparison, more highly vaccinated countries such as China and Malaysia have shorter delays in deliveries. But a successful vaccination programme does not stop further lockdown restrictions, as the Chinese government has continued with a zero-tolerance approach to Covid.

The impact of supply chain disruptions in Taiwan and Vietnam

The authorities in Vietnam have been forced to shut factories across the country due to the recent surge in Covid cases. This is hitting supply of clothing and footwear, as Vietnam is the second largest exporter of these goods to the US and the world. For instance, last year, the US imported over 20% of its clothing from Vietnam.[2]  Major US retail brands, such as Nike, have been warning about delays, shortages and the prospect of price rises. More generally, clothing inflation in the US has continued to be firm even after the positive base effects from the slump in prices last year (chart 4).

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Meanwhile, Taiwan is one of the biggest manufacturers and exporters of electronic circuit components known as semi-conductor chips. Not only has the supply of chips from Taiwan struggled with water shortages and power outages, these supply chain disruptions have been made worse by Covid. This has had a knock-on effect on the production line of other consumer goods.

Most notably, semi-conductor chip shortages have led to the worldwide closure of car plants and the sharp increase in prices.

In the US, the positive contributions from new and used cars to the core inflation rate are running at historical highs (chart 5). Prices in the used car market has been boosted by supply shortages of new vehicles. While price pressures from the auto sector appears to have peaked, it will still take time for the impact from chip shortages to ease. So, the positive impact of vehicles prices to underlying inflation is likely to remain into next year.   

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In short, getting vaccines to under-vaccinated countries saves lives and reduces the possibility of new Covid variants. But there are also broader economic implications for the rest of the world.

Governments, particularly in the EM, would have greater flexibility to re-open their economies and leave behind their zero-tolerance policies towards Covid. Not only would this boost global economic activity but it would ease the price pressures from supply shortages and disruptions.

That said, the impacts from bottlenecks to the supply-chain are often thought of as temporary. But the longer they persist, the risk is that this feeds into underlying inflation in a meaningful way. This would put more pressure on central banks worldwide to tighten policy sooner rather than later. So, ultimately, it is in everyone’s interest for policymakers to reduce the unequal distribution of vaccines.  

[1] Calculations based on Our World Data using regions defined by the IMF, 27 September 2021

[2] Calculation based on UN Comtrade Database.

This article is issued by Cazenove Capital which is part of the Schroders Group and a trading name of Schroder & Co. Limited, 1 London Wall Place, London EC2Y 5AU. Authorised by the Prudential Regulation Authority and regulated by the Financial Conduct Authority and the Prudential Regulation Authority. 

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